Mastering Commodity Volatility: Tactical ETFs for Canadian Investors

Few investors ever got the chance to experience the intensity of the trading floor at the Chicago Mercantile Exchange, where, until recently, traders flashed hand signals and used shorthand to rapidly swap options and futures for commodities like oil, natural gas, and gold. Today, this bustling hub continues to serve as a gateway to the massive commodities market – a cornerstone of the global economy. Yet, for most traders, even some institutional ones, this world would have seemed completely out of reach. But all of that has changed.

You no longer need to trade commodities directly to take advantage of this market. The rise of commodity-focused ETFs has given investors exposure to the vast resources sector, with billions of dollars of assets under management in these funds today.

However, not all commodity ETFs are created equal. Most of what’s available offers investors a return only when markets or the price of that specific commodity, rise. Given that commodities tend to experience a lot of volatility, simply making money off the gains limits a resource fund’s effectiveness.

To help traders take advantage of all market moves, BetaPro by Global X has developed a suite of inverse, leveraged, and inverse-leveraged ETFs, which allows investors to harness any directional market move – and potentially earn higher returns. We explain.

Many people like owning commodities because they can provide greater diversification and hedge against the rising costs of living, as commodity prices tend to rise with inflation.

But before you start trading, it’s essential to understand how buying and selling these assets works. Unlike investments, such as gold or shares in a company, you’re not typically purchasing a tangible item that you can later sell directly to someone else (after all, not many Canadians are prepared to store barrels of oil in their garage or arrange for transport to a buyer halfway across the world). Instead, you’re usually trading futures contracts, which, in theory, grants you the right to take possession of those barrels at a later date.

If you were to buy a commodities future (a type of standardized financial contract that outlines the price and date for a transaction for a specific commodity) at the spot price – the cost of that barrel of oil today – for $100 and then sell it a month later for $101, you’d make $1 on that sale. Futures trading is not that simple, though. Since you don’t want to own bushels of grain or build a natural gas pipeline to your house before the contract expires you need to roll those contracts over to a new contract, typically a month further out, otherwise, you would, in theory, have to take possession of the commodity.

The roll cost, as it’s called, complicates the way you earn a return when trading commodities, especially when it comes to ETFs. When futures roll over into a contract that is higher than the expected spot price, the futures curve is said to be in “contango,” meaning the futures holder is paying more money to buy new contracts. So, if the expiring month contact held by the ETF is trading for $100 (the price of the futures contract trades more in line with the spot price the closer you are to the expiration date), and it is rolling into a contract trading at $101, the ETF will not be able to buy as many contracts because of the higher price.

The curve can also bend the opposite way, with the contract being rolled over into a lower price. This version of the curve is called “backwardation.” In this scenario, the ETF would end up holding more contracts, creating a positive return for the investor.

Some traders may want their commodity ETFs to pack a little more punch, potentially amplifying their returns. To do that, they’ll need to use leverage and inverse leveraged commodity ETFs, which are the kinds of commodity ETFs that BetaPro by Global X specializes in.

By adding leverage to the futures contracts either in contango or backwardation, ETF holders can increase the effects of the roll premiums or discounts, even if the underlying commodity spot price doesn’t move much. BetaPro’s advanced suite of commodity ETFs provides leveraged (up to 2x), inverse (- 1x), and inverse-leveraged (up to – 2x) exposure to gold, silver, crude, and natural gas on a daily basis.

Those who own a 2x Daily Bull ETF, for instance, could benefit when futures are in backwardation, while investors using a – 2x Daily Bear ETF could generate a positive return when the curve is in contango. (Remember, if you just hold any other commodity ETF, you could lose money when the futures are in contango.)

Employing leverage can magnify the volatility of the futures contract, so investors must factor in the roll costs if the ETF is held over a multi-day period. Because of this, people who choose to use these ETFs need to get the directional call on the asset class right or risk greater losses.

BetaPro’s suite of commodity-linked ETFs is designed to deliver up to twice the performance (2x) or twice the inverse performance (- 2x) of the underlying commodity – but only for a single day. Over time, leveraged ETFs may not track the performance of the reference commodity, as compounding effects can distort returns.

For savvy traders who want more control over their trading strategy, this increased level of volatility could be seen as a feature rather than a detriment as it could help generate larger returns over a shorter time frame. And with most commodity markets constantly on the move, finding ways to translate smaller fluctuations into meaningful gains is worth considering.

Disclaimers

Commissions, management fees and expenses all may be associated with an investment in products (the “Global X Funds”) managed by Global X Investments Canada Inc. The Global X Funds are not guaranteed, their value changes frequently and past performance may not be repeated. Certain Global Funds may have exposure to leveraged investment techniques that magnify gains and losses which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. Please read the relevant prospectus before investing.

The Global X Funds include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value.

The BetaPro Products consist of our Daily Bull and Daily Bear ETFs (“Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (“Inverse ETFs”), and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). The Leveraged and Inverse Leveraged ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each Leveraged and Inverse Leveraged ETF seeks a return, before fees and expenses, that is either up to or equal to, either 200% or –200% of the performance of a specified underlying index, commodity futures index, or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a Leveraged and Inverse Leveraged ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the Leveraged and Inverse Leveraged ETFs, possibly direction from the performance of their respective Target(s) for the same period. For certain Leveraged and Inverse Leveraged ETFs that seek up to 200% or up to or -200% leveraged exposure, the Manager anticipates, under normal market conditions, managing the leverage ratio as close to two times (200%) as practicable however, the Manager may, at its sole discretion, change the leverage ratio based on its assessment of the current market conditions and negotiations with the respective ETF’s counterparties at that time. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF.

The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. BetaPro Inverse Bitcoin ETF (“BITI”) which is an up to -1X ETF as described in the prospectus, is a speculative investment tool that is not a conventional investment.  Its Target, an index which replicates exposure to rolling Bitcoin Futures and not the spot price of Bitcoin, is highly volatile. As a result, the ETF is intended as a stand-alone investment. There are inherent risks associated with products linked to crypto-assets, including Bitcoin Futures. While Bitcoin Futures are traded on a regulated exchange and cleared by regulated central counterparties, direct or indirect exposure to the high level of risk of Bitcoin Futures will not be suitable for all types of investors. An investment in any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment.

Please read the full risk disclosure in the prospectus before investing. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase investment products (the “Global X Funds”) managed by Global X Investments Canada Inc. and is not, and should not be construed as, investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor.

Global X Investments Canada Inc. (“Global X”) is a wholly-owned subsidiary of Mirae Asset Global Investments Co., Ltd. (“Mirae Asset”), the Korea-based asset management entity of Mirae Asset Financial Group.  Global X is a corporation existing under the laws of Canada and is the manager, investment manager and trustee of the Global X Funds.

© 2025 Global X Investments Canada Inc. All Rights Reserved.

Published January 20, 2025